These documents provide a valuable insight into the FMA's current approach and steps businesses can take to assist compliance with financial markets rules. Here’s what you need to know:
Statement of Intent
The FMA's statement of intent provides an insight into its key areas of focus over the next four years. The strategic intentions are largely based on the 2019 Strategic Risk Outlook (see FMA Strategic Risk Outlook: what's new?), which adopted a sector-based approach to risk and harm, and 'credible deterrence' as a strategic priority.
Governance and culture
One of the key areas of the FMA's focus will be on the management of conduct risk for financial services providers. With the introduction of the Financial Markets (Conduct of Institutions) Amendment Bill, the FMA will be keeping a close eye on whether financial service providers have “an appropriate customer-centric culture". In particular, businesses should ensure they are actively reviewing their incentive structures, sales and advice processes and systems to mitigate any conduct risk. To find out how financial services providers can prepare see: The Big Picture: Financial Markets - are you prepared for a conduct regulation regime?
Deterrence of misconduct
Unsurprisingly, following the adoption of 'credible deterrence' policy, the FMA will be focussing on market misconduct. In particular, focus will be placed on:
- trading misconduct,
- misconduct on the perimeter of the FMA's areas of oversight,
- compliance with Anti-Money Laundering and Countering Financing of Terrorism (AML-CFT), and
- the fair dealing provisions in the FMCA.
Already we are seeing increasing focus on these areas including with the announcement of High Court proceedings in recent weeks against an AML-CFT reporting entity for allegedly failing to conduct sufficient customer due diligence, failing to report suspicious transactions and failing to keep appropriate records.1
Trust and confidence in capital markets
In addition to its review of the NZX (discussed below), the FMA's focus on trust and confidence in capital markets will include work to promote sustainable growth in listed issuers. Emerging and innovative financial products, like crowdfunding and peer-to-peer lending, will continue to be a focus, as will support for further climate-related reporting.
NZX Obligations Review
The FMA's review of the NZX was broadly positive:
As we have noted previously (see NZXR's 2019 wrap-up), NZX has increased its focus on screening and investigations following previous comments from the FMA. This year, the FMA notes continued improvements in NZX's investigative processes as a result of the steps that NZX has taken.
However, the FMA also highlights the number of surveillance system alerts generated during the period. The NZX uses the SMARTS alerts system to detect specific forms of market manipulation (spoofing, pinging, phishing and bait and switch activities). Due to the Alert Level 4 lockdown, the FMA was unable to test NZX's surveillance team's handling of the alerts, but the calibration of the alert system and handling of the alerts generated will be an area of focus for the future.
Continuous disclosure obligations continue to attract the attention of regulators. Last year the NZX conducted 34 continuous disclosure investigations, one of which was found to be a breach. Although acknowledging the “high degree of judgement involved in the assessment of continuous disclosure matters", the FMA considers there is scope for NZX to increase the depth of its inquiries. The FMA suggests that this can be done by requiring Issuers to provide more contemporaneous support for their decisions in complex cases. Given the new listing rules introduced last year, and the FMA's ongoing focus, it is clear that NZX will be keeping a close eye on Issuers' compliance.
Issuers should ensure that they are familiar with the current requirements and have appropriate policies and procedures in place to ensure they are complied with. It is particularly important to ensure that there is contemporaneous evidence kept to back up disclosure decisions.
NZX has recently announced the creation of a new subsidiary to perform regulatory functions in order to separate this activity from its commercial functions. The FMA notes that in this new model the policy function will still sit within the commercially-orientated entity. Over the next year, the FMA will be monitoring NZX's policy decisions to ensure that the regulatory impacts are given sufficient consideration. The FMA was satisfied that NZX meets its obligations to have adequate arrangements in place to manage conflicts and notes that NZX is actively pursuing improvements.
The FMA's main objective is to promote fair, efficient and transparent financial markets. The Statement of Intent notes that 88% of stakeholders agree that the FMA supports market integrity, and the themes in the statement, and the review of the NZX, only serve to reinforce that goal.
The FMA will be continuing to focus on its expanded regulatory remit under the new conduct regulation regime for financial institutions, including monitoring the requirement for institutions to treat customers fairly. Businesses should look carefully at whether there are any steps they need to take as a result of this recent commentary.
If you have any questions about the matters raised in this article, please get in touch with the contacts listed, or your usual Bell Gully adviser.
This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.